Competence, firm procedures and written advice: sections 10.35 to 10.37

In this lesson you will

State the competence requirement in section 10.35 and how competence can be acquired
Identify who is responsible under 10.36 for firm compliance procedures
Apply the six requirements of 10.37(a)(2) to a draft advice email
Recognize when reliance on another adviser is unreasonable under 10.37(b)

How these sections changed

Before 2014, section 10.35 held the detailed "covered opinion" rules and many firms put a disclaimer at the bottom of every email. The June 2014 revision removed the covered opinion rules. Section 10.35 became a competence rule, 10.36 kept the firm procedures duty, and 10.37 became a single principles-based standard for all written advice. Those footer disclaimers are not required by the current text.

Section 10.35: competence

A practitioner must possess the necessary competence to engage in practice before the IRS. Competent practice requires the appropriate level of knowledge, skill, thoroughness and preparation for the matter. A practitioner may become competent through various methods, such as consulting with experts in the relevant area or studying the relevant law.

For staff, the practical test is simple: before you take on a partnership return with a section 754 election, a foreign information return, or an estate return for the first time, either study the rules or work under someone who knows them, and leave evidence of that in the file. The section 10.35 guide covers delegation and supervision.

Section 10.36: procedures to ensure compliance

Individuals with principal authority and responsibility for overseeing a firm's tax practice must take reasonable steps to ensure the firm has adequate procedures for all members, associates and employees to comply with Circular 230. If the firm does not name such a person, the IRS may identify one.

Under 10.36(b) the responsible individual can be disciplined if, through willfulness, recklessness or gross incompetence, they fail to take reasonable steps to put adequate procedures in place or see that they are followed, and people in the firm engage in a pattern or practice of noncompliance. The same applies when the individual knows or should know of such a pattern and fails to take prompt action to correct it.

For staff this is why the firm's checklists, review sign-offs and conflict checks exist. Skipping them is a firm-level problem, not just a personal one.

Section 10.37: written advice

A practitioner may give written advice, including by email, on federal tax matters if the practitioner:

bases the advice on reasonable factual and legal assumptions, including assumptions about future events;
reasonably considers all relevant facts and circumstances the practitioner knows or reasonably should know;
uses reasonable efforts to identify and ascertain the relevant facts;
does not rely on representations, statements, findings or agreements (including projections, forecasts or appraisals) of the taxpayer or anyone else if reliance would be unreasonable;
relates applicable law and authorities to the facts; and
does not, in evaluating a federal tax matter, take into account the possibility that a return will not be audited or that a matter will not be raised on audit.

Reliance on a representation is unreasonable if the practitioner knows or reasonably should know that it, or an assumption it rests on, is incorrect, incomplete or inconsistent.

Under 10.37(b) a practitioner may rely on another person's advice only if the advice was reasonable and the reliance is in good faith. Reliance is not reasonable if the practitioner knows or should know the opinion should not be relied on, the other person lacks competence or qualifications, or the other person has a conflict of interest in violation of Circular 230.

The IRS applies a reasonable practitioner standard, considering the scope of the engagement and the type and specificity of the advice sought. Advice the practitioner knows will be used by someone else to market an arrangement with a significant purpose of avoiding tax gets extra scrutiny.

Government submissions on matters of general policy and continuing education presentations (other than ones promoting transactions) are not written advice for 10.37.

Worked example

Reviewing a staff advice email: the Harlow family LLC

A senior drafts this email to a client: "Your new LLC can pay your 16-year-old son $14,000 for marketing work and deduct it in full. Low risk, since the IRS rarely audits small LLCs."

The manager reviews it against 10.37(a)(2):

Assumptions (item 1): the email assumes the son does real work at a market rate. Nothing in the file supports that.
Facts (items 2 and 3): the LLC's tax classification is not stated. Whether wages to a child are exempt from FICA depends on the entity type, so a key fact was not ascertained.
Law to facts (item 5): no authority is cited for reasonable compensation or the deduction.
Audit lottery (item 6): "the IRS rarely audits small LLCs" is exactly what 10.37(a)(2)(vi) prohibits.

The manager rewrites the email to state the facts relied on (single-member LLC taxed as a sole proprietorship, son works 10 hours a week on social media, rate supported by local job postings), cites the authority, describes the documentation the client needs (timesheets, payroll records), and removes the audit-risk comment.

Conclusion: the original email failed at least three of the six requirements. The rewrite meets the reasonable practitioner standard.

Self-check

Answer each question before you open the answer.

Does current Circular 230 require a disclaimer at the end of every tax email?
Show answer
No. The June 2014 revision removed the covered opinion rules that led to those disclaimers. Written advice is governed by the principles in 10.37.
Who can be disciplined under 10.36?
Show answer
Individuals who have or share principal authority and responsibility for overseeing the firm's tax practice, if through willfulness, recklessness or gross incompetence they fail to take reasonable steps on procedures and a pattern or practice of noncompliance occurs, or they fail to act promptly on a known pattern.
Name the 10.37 requirement that bars "audit lottery" reasoning.
Show answer
Section 10.37(a)(2)(vi): the practitioner may not take into account the possibility that a return will not be audited or a matter will not be raised on audit.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error